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Question

Difficulty: MediumQualitative Characteristics of Accounting Information

An accountant altered financial reporting formats and asset valuation methods from those used in prior years without disclosure or standardization, preventing investors from evaluating the enterprise's performance against its industry peers. Which qualitative characteristic of accounting information has been violated?

  1. ComparabilityAnswer
  2. B
    Business entity separation
  3. C
    Bookkeeping recording scope
  4. D
    Audit trail control

Answer

Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, financial items across time periods and across different business entities.
Comparability is an enhancing qualitative characteristic that enables financial statement users to identify similarities and differences between reporting periods and among different business entities. Inconsistent application of valuation methods and reporting formats violates this characteristic.

Step-by-Step Solution

1
Analyze the reporting defect in the scenario
The business changed valuation methods and presentation formats without consistency, impeding multi-period and peer analysis.
Consistent accounting policies are necessary for users to compare performance over time.
2
Map the defect to qualitative characteristics of accounting information
Inconsistency in application directly impairs comparability, an enhancing qualitative characteristic.
Comparability requires that financial information be prepared using consistent principles so that meaningful trends and comparisons can be drawn.

Key Concept

Qualitative Characteristics of Accounting Information - Comparability
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Qualitative Characteristics of Accounting Information